Key Person Insurance is a life assurance policy taken out by a business on a director or key employee.
Why does my business need it?
In the event a key director or employee dies suddenly or suffers a serious illness, the financial consequences for the business could be severe, such as;
- Loss of key clients or contracts due to the loss of that individual
- Bank debt may be considered in default, if the deceased individual had given personal guarantees
- There may be a need to recruit a suitably qualified replacement, which may be costly
- There may be a need for additional capital to help the business survive the loss
- In a “one-man” operation, the business may have to be liquidated requiring surplus capital for their financial dependents
It may also be a requirement for external investors or financial institutions prior to providing capital to the business
Who is a Key Person?
A Key Person is a business owner or employee whose sudden death or illness may have a significant financial impact on the business
How is the policy set up?
- The Company passes a resolution at a board meeting to the effect that a Key Person policy is required on a specified individual for a specified amount and term
- A life assurance application is completed with the Company as the policy owner and the individual as the life assured
- Depending on the amount of cover required, a Key Person questionnaire and/or supporting financial statements may be necessary
How much cover do we need?
It will depend very much on the reason for cover. If the reason is to cover outstanding borrowings, the sum assured and term should match this debt. If the reason is to provide for financial loss or replacement of the individual, the sum assured could be up to 10 times annual income
In certain circumstances, you may need to include Specified Illness insurance.
How long should the policy last?
If the policy to cover investors or bank debt, the term should be linked to the period specified in the loan/investment agreements. Otherwise, typically a 10 year term with an option to continue the policy beyond that date would suffice.
What can the proceeds be used for?
The proceeds can be used to repay bank or third party borrowings, repay loans made to the business by the Key Person, be used to replace future lost earnings, or for use in the business
Are the proceeds taxed?
If the policy was arranged to protect bank loans and the proceeds are used for this purpose, they will be tax free. If the proceeds are to be used by the business for any other purpose, they will be treated as a revenue receipt and may be subject to corporation tax, if they contribute to the company making a profit in the financial year they are received.
It is important that where there is a dual need related to borrowings and loss of income, that separate policies are arranged to reflect the different tax treatments.
Is there tax relief on the premiums?
Typically, there is no tax relief on the premiums as the test for eligibility for tax relief is quite restrictive. However, this is something you must discuss with your financial advisor and/or accountant to see if the purpose for cover will qualify the premiums for tax relief.
To arrange Key Person Insurance
Please contact us on 1890 428 343 and ask to speak to one of our experts on Business Protection or complete the Quick Enquiry form and we will call you back.